You have the Quality of Earnings (QoE) report. It tells you the adjusted EBITDA is $4.2M. The customer concentration is manageable. The churn is acceptable. But there is a line item that never appears on a standard QoE, yet it likely represents the single largest immediate opportunity for multiple expansion: Revenue Leakage.
Revenue leakage is not bad debt. It is not a failure to sell. It is the silent execution gap between the work your target company performs and the invoice they send. It is the "quick question" that turns into a four-hour advisory session. It is the senior partner who discounts a bill because they "feel bad" about a delay. It is the consultant who logs 36 hours instead of 42 because they dread the time-tracking system.
In the current vintage of professional services deals, where average EBITDA margins have compressed to 9.8% according to Deltek’s 2025 data, you cannot afford to buy a bucket with holes in it. For a firm doing $20M in revenue, a standard 4-5% leakage rate represents $800k to $1M in lost EBITDA. At a 10x multiple, you are leaving up to $10M in enterprise value on the table simply because the target firm lacks the operational hygiene to bill for the value they already deliver.
When conducting operational due diligence, stop looking at the sales forecast for a moment and look at the "Realization Gap." Recent benchmarks from SPI Research and TSIA indicate that while top-tier firms achieve billable utilization rates of 75-80%, the industry median has slipped to 68.9%. That delta isn’t just idle time; often, it is unbilled time.
Your target firm might report 72% utilization. But what is their Realization Rate? If a consultant works 10 hours (Utilization), but the contract cap or ad-hoc write-down means only 8 hours get invoiced, your effective realization is 80%. Deltek's 2025 Professional Services Maturity Benchmark highlights that firms with poor time-tracking discipline often lose 15% of chargeable work to this gap. You are paying salaries for 100% of the work but collecting cash for 85% of it.
Scope creep is the most common source of leakage in fixed-price projects. Without a rigorous Change Order process, delivery teams absorb extra requests to "maintain the relationship." Project Management Institute (PMI) data suggests that unchecked scope creep increases project costs by an average of 15%. In a due diligence context, look for a high volume of projects with 0% margin variance despite delays. If a project is three weeks late but the margin hasn't moved, the costs are being buried elsewhere.
Founder-led firms often treat pricing as a fluid negotiation rather than a system. TSIA benchmarks consistently show that ad-hoc discounting at the invoice stage—often done by partners to smooth over delivery bumps—can erode net margins by 200-300 basis points. If the firm lacks a formal "Deal Desk" or pricing authority matrix, you can assume their effective hourly rate is 10-15% lower than their rate card implies.
Before you close, or immediately within the first 100 days, you must quantify this leakage. Do not rely on the seller's assurance that "we bill for everything." Validate it with a bottom-up audit of the last 50 closed projects.
The good news is that leakage is fixable without hiring a single new salesperson. By implementing a modern PSA (Professional Services Automation) tool and enforcing a "No Change Order, No Work" policy, you can typically recapture 3-5% of revenue in the first year. This is the highest-ROI work an Operating Partner can do.
For a deeper dive on fixing utilization issues, read our guide on billable utilization targets. If you suspect the issue is structural, review our framework for auditing revenue leakage immediately post-close. Don't let tribal knowledge obscure the numbers—standardization is the cure.
